The SEC’s new rules may prove to be a headache for companies that use small amounts of conflict minerals and that do not closely track the sourcing of conflict minerals throughout their supply chain.
Section 1502 (the “Conflict Minerals Provision”) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which passed Congress last year, requires companies to disclose to the SEC the use of conflict minerals that are “necessary to the functionality or production of a product manufactured by such person.” On December 15, the SEC voted unanimously to propose rules that would require disclosure of the use of conflict minerals originating in the Congo or an adjoining country. Among other inputs, conflict minerals include tin and tungsten.
An attestation of conflict mineral controls to the SEC is necessary regardless of the amount of the mineral involved, including if the conflict mineral is intentionally included in a product’s production process and is necessary to that process, even if that conflict mineral is ultimately not included anywhere in the final product. This rule would apply equally to companies that manufacture products and to companies that “contract to manufacture” their products. The proposed rule does not include an exemption for foreign private companies or smaller reporting companies.
The proposed rule requires every company to disclose in its annual report whether its conflict minerals originated in Democratic Republic of the Congo (DRC) region countries. If a company’s conflict minerals did originate in DRC-region countries, the company will be required to furnish a Conflict Minerals Report, in addition to its annual report. The Conflict Minerals Report would include, but would not be limited to, a description of the measures the company has taken to exercise due diligence on the source and chain of custody of its conflict minerals, including a certified private sector audit of the Conflict Minerals Report.
The SEC is required to adopt the rule by April 15, 2011. Therefore, a December 31 fiscal year-end issuer would first have to provide conflict minerals disclosure or a Conflict Minerals Report after the end of its December 31, 2012 fiscal year. An issuer with a May 31 fiscal year-end would have to provide the conflict minerals disclosure or a Conflict Minerals Report in its annual report for the fiscal year that encompasses the period from June 1, 2011 through May 31, 2012.
It may take time for companies to prepare for compliance with the SEC’s forthcoming conflict minerals rules. Please do not hesitate to contact Squire Sanders’ regulatory and financial services teams to learn more about the requirements of the new rules (e.g., which SEC filings must include a conflict minerals attestation) and about ways by which companies can reasonably track conflict minerals throughout the supply chain to the satisfaction of the SEC.